Keith Rodgers says assessing performance will change staff costs from an overhead to an asset

Risk management covers a multitude of sins in the financial services sector, but it's taken on new meaning for the directors of HBOS' insurance and investment division since its HR department stepped in.

Every six months, individual board members now carry out a 'key person dependency' assessment to establish which roles within their divisions are critical to the success of the business. In turn, they look at who fills each role, work out ways to reduce the risk of losing them - and prepare a Plan B in case the worst happens.

This kind of 'succession planning' is likely to become more common across the insurance sector as organisations start to take a closer interest in retaining their most valuable employees.

Once reserved for chief executives and other senior board members, the technique is now being applied across vast swathes of organisations, reflecting the fact that even relatively junior employees can play critical roles in a company's development.

Whether it's an IT manager with hard-to-find technical skills or a salesperson with specialist product knowledge, losing key employees can disrupt a business and present significant recruitment challenges.

In many industries, succession planning is now seen as one component of a broader, strategic approach to employee management that ties together different disciplines such as recruitment, training, performance management and compensation.

Sometimes referred to as human capital management, the focus is on hiring, retaining and developing key employees over the long-term, and treating them as assets rather than overhead.

It's not hard to see why. Several years ago, Royal Bank of Scotland carried out an analysis of all the costs incurred to fill a job, from the time line managers spend on interviewing to the inevitable drop in productivity that occurs as an employee works out his notice period.

It concluded that the equivalent of one year's salary will typically be spent before a replacement employee is fully up to speed and moves from being a net cost to the organisation to a net asset.

That puts a whole new perspective on employee expenditure, and suggests that in many cases, money spent on pay increases or training in an effort to retain an employee may actually represent a long-term saving.

Certainly, the experiences of HBOS insurance and investment - which includes the Halifax General Insurance arm where the succession planning programme was launched - suggest that these kinds of human capital management initiatives can have a tangible impact on a business.

Pat O'Kane, senior manager of leadership and organisational development, points out that some strategic changes at the company relied on work carried out by the HR teams.

When it was looking to bring its outsourced loss-adjustment business back in-house, for example, it needed a means to assess its existing employees' capabilities and work out what extra skills and competencies should be brought on board.

Halifax GI had already started building that HR infrastructure through a comprehensive employee assessment and development programme, launched around three years ago. The HR team started out by building a 'competency framework', consisting of six common attributes that applied to all jobs.

These competencies were defined in more detail for five different levels of employee, from junior staff members to senior managers, explaining what qualities constituted good and bad performance (see box right).

Performance appraisals
In isolation, this kind of competency model can be fairly academic, but its value comes from the way that it hooks into other people's management initiatives. HBOS insurance, for example, uses the framework as the basis for its employee performance appraisals, ensuring that there's some level of standardisation in the way employees are assessed across the company.

In turn, those reviews identify individual development needs, which are fed into the company's training programme. Similarly, the outputs from the review influence employee pay rises and bonuses.

Connecting these different people management activities together can be very effective. Many companies blow money on irrelevant training programmes, for example. But with an integrated approach, courses can be directly targeted at weaknesses identified in the appraisal process.

Better still, managers will be able to assess in later reviews whether the training was effective in improving the employee's skills or behaviour, bringing greater accountability to an area of HR that's notoriously hard to measure.

While the potential upside is high, however, building this kind of HR infrastructure isn't easy. While the competency model itself might be relatively simple, getting company-wide agreement on the definitions can be a political nightmare - one multinational company spent two years setting up a pilot programme before abandoning the venture altogether.

Similarly, it's not always easy to convince line managers to carry out appraisals or release staff for training, although employees are more likely to force the issue if they know their pay rises and bonuses depend on it.

Ultimately, a lot comes down to how inclusive the process is.

O'Kane believes that getting senior management buy-in was critical to driving the project through at HBOS, as was the team's decision to bring in representatives from across the business to help develop the competency framework.

The HR department also ensured the framework was relevant to line managers by allowing them to personalise the competencies to suit their teams' specific needs.

"That helped us move it forward at a reasonable pace and ensure that we have advocates in the business, so that it's not seen as an HR-led process," he says. IT

Succession planning
Although traditionally carried out behind closed doors and reserved for senior managers, the succession planning programme at HBOS Insurance is widely publicised internally and is now applied across its five levels of employees.

Employees identified as having potential for development go through an assessment centre, where they work with their line managers and assessors on a structured programme focusing on their career development. So far, a significant number of level five employees and two thirds of level four employees have been through some form of assessment over the past two years, and around a third of staff at level three.

As well as providing a concrete career development programme for employees, one big advantage of standardising succession planning in this way is that it provides meaningful information about strategic workforce issues.

For example, HBOS insurance and investment can now tell executives how many employees have been promoted after going through the assessment centre (70% at the last count), and how many level three employees are top performers.

Historically, HR departments have tended to fall short on reporting, focusing on operational metrics like average recruitment times that have little meaning for business managers. These new kinds of metrics, by contrast, give senior management a far better insight into how effectively they're developing their most talented employees.

Competency framework
The 'competency framework' developed by Halifax General Insurance identifies six attributes that are central to all jobs, such as business acumen, efficiency and influence.

These competencies are defined in greater detail for five levels of jobs (from junior employees to senior managers), and benchmarks are set to help managers assess employees' performance during performance appraisals.

The criteria vary considerably according to seniority. For example, a junior employee would be ranked at the bottom of the scale ('off the pace') in terms of their ability to influence others if they didn't speak up when things were wrong or focused on negatives.

Conversely, they would be 'ahead of the pace' if they could handle conflict without

getting aggressive. For senior managers, by contrast, being 'ahead of the pace' means being "an independent and courageous thinker", who is prepared to have their ideas challenged, and to encourage other to consider unconventional approaches to business.

Following the recent merger of its insurance and investment arms, the core competencies are being changed to complement a new leadership programme being rolled out across the entire HBOS organisation. All positions up to executive level will now be assessed in relation to four competencies - lead, shape, build and deliver.